Current and Future Financing Requirements
A start-up company normally receives its funding from two sources:
- amounts paid by the shareholders for their shares; and
- loans made to the company by the shareholders and/or banks.
There may also be an agreement between the shareholders that further loans will be made to the company, or shares subscribed, at a future date, or as and when the company needs further money.
A shareholders agreement can set-out how the company is going to be financed. How much are the shareholders going to contribute to the company? When and how will these contributions be made? Is all of the money required when the company is formed or can it be paid in stages?
In the case of loans by the shareholders to the company, the terms of such loans can be recorded in the shareholders agreement, including (a) when the loan is repayable; and (b) whether and how much interest is payable on the loan.
The agreement can also oblige the shareholders to co-operate in trying to obtain a bank loan for the company where appropriate.
Guarantees by Shareholders
A shareholders agreement can set-out whether the shareholders are going to guarantee or accept primary responsibility for any of the obligations of the company.
This is particularly relevant in relation to bank loans. If the bank requires a loan guarantor should the shareholders be obliged to provide that guarantee? Which shareholders; all of them or just one? If only one of the shareholders guarantees the loan should they be compensated for taking on that guarantee?
Salary of Directors
A shareholder holding the majority of the shares in a company can ultimately control the salary of the directors.
The agreement can set-out the initial salary of the directors. Often the directors will agree not to draw a salary for a set period, or until the company becomes profitable. The shareholders can also agree on how increases in the salary of the directors will be decided. Should salary increases require the consent of all shareholders?
A shareholders agreement works in conjunction with a well drafted employment contract to regulate the directors' salaries.
Dividends are paid to shareholders out of profits of the company (after taking into account past losses).
In the absence of an agreement to the contrary, a majority shareholder can ultimately decide whether and how much of an available dividend is paid to the shareholders. Minority shareholders have hardly any influence here.
Lets take the example of a company with two well-off shareholders holding 30% each of the shares in a company, and a further not so well-off shareholder holding 40%. The well-off shareholders decide that all profits should be retained by the company for investment in new projects, rather than paid out to the shareholders as dividend. Because the two 30% shareholders have a majority between them (60%), the 40% shareholder will not have the right to receive a dividend from the company, even if they desperately need the money.
A shareholders agreement can set-out the dates and amounts of available dividends that should be paid to the shareholders after the company becomes profitable. This will allow the shareholders to better prepare their future personal finances.
A shareholders agreement can control the use of the company bank accounts, including regulating:
- the opening and closing of bank accounts;
- changing the bank that the company uses;
- who has authority to write cheques and setting appropriate maximums; and
- use of company credit and debit cards.
A shareholders agreement can require the preparation of management accounts and reports for the shareholders.
Shareholders do not have an automatic right to examine the accounting books and records of their company (unless they are also directors). The agreement can give the shareholders this right of inspection.